高盛 (GS) 2014 Q3 法說會逐字稿

Good morning.

My name is Dinness and I will be your conference facilitator today.

I would like to welcome everyone to the Goldman Sachs third-quarter 2014 earnings conference call.

This call is being recorded today, October 16, 2014.

Thank you.

Mr. Holmes, you may begin your conference.

Good morning.

This is Dane Holmes, Head of Investor Relations at Goldman Sachs.

Welcome to our third-quarter earnings conference call.

Today's call may include forward-looking statements.

These statements represent the Firm's belief regarding future events that by their nature are uncertain and outside of the Firm's control.

The Firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect the firm's future results, please see the description of risk factors in our current Annual Report on Form 10-K for the year ended December 2013.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our investment banking transaction backlog, capital ratios, risk-weighted assets, and global core access.

You should also read the information on the calculation of non-GAAP financial measures that is posted on the Investor Relations portion of our website at www.gs.com.

This audiocast is copyrighted material of the Goldman Sachs Group Inc, and may not be duplicated, reproduced, or rebroadcast without our consent.

Our Chief Financial Officer, Harvey Schwartz, will now review the Firm's results.

Harvey?

Thanks, Dane, and thanks to everyone for dialing in.

I'll walk you through our third-quarter results, and I'm obviously happy to answer any questions.

Third-quarter net revenues were $8.4 billion.

Net earnings, $2.2 billion.

Earnings per diluted share, $4.57.

Core to our strategy over the past few years has been a consistent focus on strengthening our relative position within the industry.

Our success begins with a fundamental approach of engaging our clients, understanding their challenges, and then addressing their needs.

That is the foundation for expanding the breadth and depth of our existing relationships and the basis for building new ones.

For the first nine months of 2014, revenues are $1.4 billion higher than this time last year.

The increase reflects the combination of greater client activity in certain businesses and a strong market position.

For example, as client activity picked up in global M&A, you saw an increase in our market share.

Our global market share in announced M&A for the year-to date of 29% is up 300 basis points compared to 2013.

Our volume advantage to our next closest peer is more than $100 billion.

We have also been focused on making sure that we are well-positioned to deliver operating leverage as client activity increases.

In 2011, we announced an operating efficiency initiative.

This initiative was subsequently increased twice and ultimately reached nearly $2 billion.

We continue to expand upon that prior initiative to grow margins and increase returns.

The benefits of those efforts are demonstrated in our year-to-date results.

We had $1.4 billion of incremental revenues and nearly $1 billion of incremental pretax earnings.

Ultimately, the embedded operating leverage contributed to an improvement in our year-to-date annualized return on common equity to 11.2%.

We have also achieved this result by being a prudent allocator of our global resources.

Getting this right not only drives positive results for our clients but also for our shareholders.

Now let me take you through the quarterly results for each of our businesses.

In investment banking, we produced third-quarter net revenues of $1.5 billion, down 18% compared to a strong second quarter.

Importantly, our investment banking backlog increased again during the quarter, reaching its highest level since 2007.

Third-quarter advisory revenues were $594 million, up 17% from the second quarter on an increase in completed activity.

Year to date, Goldman Sachs ranked first in worldwide announced and completed M&A.

We advised on a number of significant transactions that closed during the third quarter, including Hillshire brands $8.6 billion sale to Tyson Foods, InterMune's $8.3 billion sale to Roche Holdings, and Gates Corporation's $5.4 billion sale to Blackstone.

We're also an advisor on a number of significant announced transactions.

For example, we are advising on TRW Automotive's $13.5 billion sale to ZF Friedrichshafen, Siemens $7.6 billion acquisition of Dresser-Rand, and Corio's EUR7.2 billion sale to Klepierre.

Moving to underwriting, net revenues were $870 million in the third quarter, down 32% compared to record second-quarter results.

Equity underwriting revenues of $426 million were 22% lower sequentially, as industry-wide activity decreased declined in the third quarter across secondary offerings.

Year-to-date, Goldman Sachs ranked first in global equity and equity-related and common stock offerings.

Debt underwriting revenues decreased 39% from a record second quarter to $444 million due to reduced activity, particularly within leveraged finance.

During the third quarter, we remain committed to meeting our clients' diverse financing needs.

Whether it was Alibaba's $25 billion IPO, Cisco's $5 billion financing in support of its acquisition of US Foods, or AEP's $1.6 billion high-yield offering.

Turning to institutional client services, net revenues were $3.8 billion in the third quarter, with client execution of $2.2 billion and equities of $1.6 billion.

ICS includes a one-time $270 million gain related to the tender of a portion of our trust preferred securities.

Excluding fixed portion of the one-time gain and DBA, [thick] client execution net revenues were $2 billion in the third quarter, down 11% sequentially.

Mortgages declined quarter over quarter, as clients were less active amid a relatively backdrop for prices.

Credit declined significantly, as increased volatility, wider credit spreads, and lower issuance provided a more difficult backdrop.

Currencies, interest rates, and commodities were all higher sequentially, as volatility and volumes generally increased from relatively low levels.

When you exclude equity's portion of the one-time gain in DVA, the results within the segment were as follows.

Total equities net revenues were $1.5 billion, down 10% sequentially.

Equities client execution net revenues of $372 million were down 26% quarter over quarter, reflecting lower net revenues and cash products.

Commissions and fees were $745 million, relatively flat with the second quarter.

Securities services generated net revenues of $343 million, down 8% sequentially from the seasonally stronger second quarter.

Turning to risk, average daily VaR in the third quarter was $66 million, down 14% relative to the second quarter, mostly driven by interest rates.

Moving on to our investing and lending activities, collectively they produced net revenues of $1.7 billion in the third quarter.

Equities securities generated net revenues of $876 million, primarily reflecting Company-specific events, including IPOs and net gains in public equities.

For example, one of our investments, Mobileye, went public, and our investment generated $285 million in net gains during the third quarter.

Net revenues from debt securities and loans were $606 million, and benefited from net gains on certain investments due to asset sales and net interest income.

Other revenues of $210 million include revenues from the Firm's consolidated investments.

In investment management, we reported third-quarter net revenues of $1.5 billion.

Management and other fees reached a record $1.21 billion.

During the quarter, total assets under supervision increased $8 billion to a record $1.15 trillion.

Let me quickly walk you through the long-term flows.

Long-term assets under supervision had net inflows of $13 billion, with $7 billion in equity assets and $6 billion in fixed income assets.

This was largely offset by foreign currency translation, which drove net market depreciation of $12 billion.

As we have discussed before, the key to long-term success is delivering strong and consistent performance for our investment management clients.

Across the global platform, 81% of our client mutual funds assets ranked in the top two quartiles on a three-year basis, and 76% ranked in the top two quartiles on a five-year basis.

Now let me turn to expenses.

Compensation and benefits expense, which includes salaries, bonuses, amortization of prior-year equity awards, and other items such as benefits, was accrued at a compensation-to-net-revenues ratio of 40%.

This is 300 basis points lower than the Firm's accrual in the first half of the year.

The lower compensation accrual reflects stronger year-to-date revenues, greater clarity on full-year compensation levels, and our continued efforts to improve operating efficiency across the Firm.

Third-quarter non-compensation expenses were $2.3 billion, down 4% sequentially.

Now let me quickly run you through some key stats.

Total staff at the end of the third quarter was approximately 33,500.

This is up 3% from the second quarter due to summer hiring.

Our effective tax rate was 31% year to date.

Our global core excess liquidity ended the quarter at $180 billion.

Our Basel III common equity tier-one ratio was 11.8% using the advanced approach.

It was 11.1% under the standardized approach.

Our supplementary leverage ratio finished the quarter at 4.9% based on the final rules.

We repurchased 7.1 million shares of common stock for $1.25 billion during the quarter.

And finally, we announced an increase in our quarterly common stock dividend from $0.55 to $0.60 per share.

Before we turn to Q&A, let me leave you with some concluding thoughts.

A constant in our history as a public Company is an unrelenting desire to provide world-class service to our clients and superior returns to our shareholders.

Given the dynamic nature of our industry, meeting that objective requires adaptability.

Since we went public in 1999, there are several examples that are readily available.

We went from $250 billion in assets in 1999 to $1.2 trillion in 2008 and then back to approximately $870 billion today.

And along the way, we made Goldman Sachs a stronger firm.

We increased our common equity from $10 billion to over $70 billion and substantially increased our liquidity pool, which now sits at $180 billion.

We've expanded our global footprint and increased the diversity of our franchise.

Our number of offices is up by more than one-third to over 50, with one-quarter of our staff located in Bangalore, Salt Lake City, Singapore, and Texas.

Back in 1999, we had approximately 3,000 people in our technology division; now we have nearly 8,000.

They represent close to one-quarter of the Firm.

We also built an asset management business, largely organically, from a few hundred billion in assets under supervision to $1.15 trillion today.

By adapting, we have fundamentally improved the strength of our firm, our opportunity sets and as a result, our ability to deliver for our clients and our shareholders.

Going forward, we will make any necessary changes to continue our history of providing superior client service and generating industry-leading returns.

It's what our clients, our shareholders, and our culture demands.

Now, just before I take your questions, I'd like to make one additional closing comment about the market environment we've seen over the past week, and particularly yesterday and this morning.

It's clearly an environment that reminds all of us about the power of an investor sentiment, and how fragile it can be at times.

Yesterday, in particular, it's clearly a market in the morning where investors were, quite frankly, shooting first and asking questions later.

We've seen this market reaction in the past and while painful, it's somewhat a normal part of how markets function.

Clearly, investors are now debating whether we will see lower rates for longer, and more importantly, whether the global economy is slowing or continuing to grow.

These are questions that the market is has certainly debated before.

We've always believed that over the long term, markets follow fundamentals.

In speaking with our economists only yesterday, they would argue that nothing has fundamentally changed in the past two weeks or certainly the last 24 hours regarding the long-term outlook for the global economy.

That doesn't mean it will continue to grow, but it certainly doesn't mean it will stall.

For us, in any environment, it's always about staying close to our clients.

Yesterday, was a difficult day for many of them.

Our focus is being there for them.

We have intellectual capital and the financial capital to help address their needs, and we remain committed to doing it.

With that, I'm happy to take any of your questions.

(Operator Instructions)

Glenn Schorr, ISI.

Hi, thanks.

Good morning, Glenn.

So investment and lending continues to do great, and the future will be what it is with this quarter.

But I'm just curious, you mentioned the good IPO market obviously, but if you could break down maybe on the equity side what was realized gains versus marks?

And then, if we've seen any big changes in the composition of the overall asset base between equity, debt, and lending assets?

So there hasn't been a major shift from the -- if you look at the investing and lending balance sheets, you won't see a major shift in terms of the quarter.

As you know, the investing and the lending business, it's a long-term business, and so you'll see big changes over time.

Obviously, as I highlighted, we continue to harvest; part of that is obviously driven by the strength in the markets, but also part of that is driven by the idiosyncratic strength of the portfolio.

So it continues to perform quite well.

But no breakdown on realized, unrealized on the equity side?

So it's not a question of realized or unrealized, that's why I'm struggling with that point.

In terms of, are you talking about things that -- for example, public versus event-driven events, but where we always mark to market the portfolio as we work through.

And so a good portion of the events of the past quarter were the result of events and IPOs, as I highlighted.

Okay.

Good.

That's all I was really going towards.

Sorry.

I got confused by your language.

No worries.

I confuse myself too.

I appreciate the comments on some of the balance sheet data that everyone's looking for.

Maybe just one more thing, on total losses absorbing capital, you're at the highs, you have tons and you've turned out a lot of your long-term debt.

You also have among the highs on short-term wholesale funding at last look, which the Fed has focused on.

And so last quarter you did a bunch of repositioning ahead of CCAR and reducing balance sheet in the repo book.

I'm assuming that no callout means no big changes this quarter, but if you could just comment on your views on repo book size, short-term wholesale funding, and if any more adjustments are needed?

So at this stage, we don't feel there's any adjustments needed.

As we highlighted and we focused on in the last quarter, the balance sheet had come down pretty significantly.

I will say with respect to the balance sheet, as you know, it's always going to be dynamic.

And we'll always take our cues from our clients in the marketplace.

But as you saw in the quarter, it basically went up $9 billion.

And when you compare the quarter end to quarter end, second quarter to third quarter liquidity pool, basically all of that is in the liquidity pool so that was any growth in the balance sheet.

In terms of the balance sheet, we're going to continue to remain very disciplined in terms of returns.

And as you said, there was a response in terms of the CCAR process last year, which drove us to reassess our ROA hurdles that we require, and we did that in conjunction with our clients.

But we'll continue to focus on it.

But as you said, the Firm's capital levels and liquidity levels remain quite high.

At this stage, 20% of the balance sheet is our liquidity pool.

Yes.

I'm with you.

Last one is -- appreciate your comments on the market.

In the past, when there were big spikes in volatility, if it happened in the short period of time that was typically bad for the broker-dealer community, but inventories are down like I don't know, 80%, 90%.

I'm just curious if big spikes in volatility are less painful this go-round, given all the changes in broker-dealer balance sheets?

So I think the comment with respect to the short-term reaction function as it relates to market volatility, as I mentioned yesterday, today, particularly difficult days for our clients.

And if it's difficult for our clients in the short run, markets can be challenging.

And so we always root for good things for our clients and for good markets.

I'll have to see how this period of volatility translates.

If you take a step back and you look at the third quarter, we came into the third quarter, everybody was focused on the fact that there was absolutely no volatility.

And as we sit here today, people feel like there's too much.

So it's a little bit of too hot, too cold.

In September, I think the takeaway from September is that in the right market environments, you can really see a huge pickup in client activity, and then you can see the operating leverage for us.

In terms of the derisking, in terms of the balance sheet that you've seen across the industry, I don't think that's a quote-unquote broker-dealer issue.

I think if you look across large global financial institutions, and you look at the reduction in risk-weighted assets over the course of the past several years, I think that's a question that we'll see over time as to whether or not that decline in risk-carrying capacity along with other adjustments and other regulatory rules, what impact that has ultimately on liquidity for the marketplace.

So we'll see.

I hear you.

Okay.

Thanks very much.

I appreciate it.

Thanks Glenn.

Michael Carrier, Bank of America Merrill Lynch.

Hi, thanks Harvey.

One thing on the numbers, in terms of the -- I think you gave the advanced and the standardized and it looks like that might've been the transitional for the general comment.

Wondered if you have the fully phased in?

Yes, so fully phased advanced is 10.6.

Fully phased standardized is 10.

And I'll remind you again that I think maybe it's a midpoint between fully phased and advanced.

If you were to think about -- sorry, fully phased and advanced, if you think about how our capital ratios will migrate as we take investments out of funds, more or less, think of it as a midpoint in terms of the long-term projection.

That of course, if you assume between now and 2018 the balance sheet was totally static.

Okay.

That's helpful.

Which of course it won't be.

And on compensation and the comp ratio, I think the color that you gave is helpful and obviously it's a moving target.

When I think about this year, last year, the true-up that you do in the third quarter, and then you're trying to gauge what can happen in the fourth quarter, is there anything that's changing or is it just the same process?

You'll see how the revenue environment factors in and then we'll readjust in the fourth quarter?

I just want to make sure the process isn't changing versus what you've done in the past.

Well, absolutely no change in the process.

I won't drag you through the underpinnings of the process.

We talked about it a lot, but at its core, it's just pay-for-performance.

That's the philosophy and that's how we do it.

In every quarter, we make our best estimate as to the compensation accrual.

And I think the extent to which you're seeing it change, there's no change in process.

But you've seen a change over the last two years just in our operating leverage and the cost-reduction efforts that are coming in.

And so this year's accrual reflects the fact that last year's third quarter with 25% better year over year, third quarter, third quarter, and we're running $1.4 billion ahead in revenues.

And so that just gives us greater clarity in terms of the compensation levels, but it reflects I think, more predominately, the operating leverage that's in the business.

Okay.

And finally, just on I guess you went through some of the ratios on all the regulatory changes that we know.

And then, coming up whether it's an SBAR, [INAUDIBLE], things that are ahead, but it also sounds like the industry is doing some things to maybe get in front of that.

And whether it's the agreement on derivatives, some chatter on the repo markets, going through CCPs.

So on any of these initiatives that are in the works, is there anything that you would point to that might take care of or deal with some of the concerns that this -- the future regulatory items are focused on?

I know it's early, so I know typically you don't want to comment too much until the rules are out there.

But wanted to get your take because it does seem a little bit different on the industry is trying to get in front of some of these things.

So I think it's a really, really important question and I think that when you look at any one of the rules that, as an industry, we work with regulators on and regulators have put in place, capital requirements, liquidity requirements under the LCR, leverage test, in any one of these rules, you could have a very active and heated debate with respect to the molecules and the rule and whether this was calibrated too intensely.

But I don't think you can debate really, the concept of the rule.

And so I think in concept, most of the rules we've seen have made sense, and that goes back to the initiatives around clearing, swap-execution facilities.

And I think, and I said this before, I think you have to get the regulators a lot of credit, quite frankly, for creating an immense amount of regulation and thoughtful regulatory response and giving folks a long timeline to adjust to it, very important for our clients and for the capital markets.

I think the big opening question is, -- and it's a very, very hard thing for any market participant or regulator to way, is what's the collective weight of all of this?

And I don't know that we'll really be able to assess that until a lot of time passes.

I think when it comes to things like the discussions around having repo clearing, I think those are good healthy market reactions.

Generally speaking, those are a combination of discussions with clients, because they raise concern.

Regulators observe, for example, increased bailouts and treasury markets.

And I think it's incumbent upon all of us as market participants to be thoughtful and creative about how we make sure that we protect our capital markets.

But I do think it's pretty early days in being able to assess these things.

But I think the industry's being very active in trying to make sure that we have the most robust capital markets in the world.

Okay.

Thanks a lot.

Christian Bolu, Credit Suisse.

Good morning, Christian.

Good morning.

Just wanted to follow-up on the question on investment lending.

Debt revenues, in particular, were robust this quarter.

And stands out, given the backdrop for credits were choppy in the quarter.

You mentioned asset sales.

I would appreciate any color on how much asset sales drove this quarter's revenues.

And more broadly, any color on the long-term drivers of the debt line.

So in terms of the long-term drivers of the deadline, again, this is just going to be our approach to how we think about allocating capital and when we see opportunities.

So during the period, it's not so much that a specific asset will be responding to a particular change in credit spreads in the marketplace, but it will be driven by harvesting over a long period of time.

So as companies refinance their capital structures, we may be a beneficiary in that.

For example, if we are providing mezzanine-level debt to a particular entity, and so that's why we said that it was driven by net gains on investments.

And of course, there's net interest income in there also, which is roughly about $200 million.

Okay.

That's helpful.

Just on the investment banking backlogs, you mentioned that remains strong and increasing in this quarter.

Just curious, do you have any sense of how much of your backlogs are tied to so-called tax-inversion deals?

So with respect to the backlog, the backlog again was the highest it's been since 2007, and actually when we look at it, we look at it across the three categories of advisory, equity underwriting, and debt underwriting, obviously.

And all categories were up, so that was good to see.

It's not a question of inversions in the backlog.

When you actually -- when you talk to our M&A team, and you actually look at the data either this year or over long periods of time, inversion transactions have not been a significant driver of global M&A activity.

And really, when you get into conversations with the team, what they'll tell you is it's not -- it's never just about an inversion or a tax benefit.

It's really about the strategic benefits that the two organizations can come together.

Okay.

That's helpful.

Just a quick cleanup question here.

In the earnings release, you referenced high impairment charges in non-comp expenses.

Just would be helpful if you could size that and what the nature of those charges related to.

I'm just trying to get a sense of --

I heard that you referenced non-comp.

I didn't hear the first part of what you said though.

You said higher impairment charges within the non-comp line, per your earnings release.

It's not a material number.

We just call it out.

But as you know, every quarter, we mark to market the balance sheet, and so assets sitting on the balance sheet, but at this quarter it wasn't material.

It was roughly about $50 million.

$50 million, okay, thank you.

Lastly for me, you spoke about strengthening your relative positioning across all your businesses.

I guess the equities business is probably the one place where there has been some market share slip, based on reported numbers anyway.

I appreciate those numbers on apples to apples.

I would be curious to maybe help us frame Goldmans competitive position in that business and longer-term outlook.

So we can cut to the quick on that.

With respect to the longer-term outlook and our sense of position in the marketplace, we couldn't be more pleased with it.

We measure the business by our engagement with clients and our ability to deliver to them, and that's in the prime brokerage business, it's in our global footprint, our ability to provide electronic solutions in terms of trading, commit capital, and obviously, our connectivity with our banking team in terms of driving capital markets transactions.

And so from a franchise perspective, we couldn't feel better about it.

Quarter-to-quarter in terms of topline revenue, I know that's the data that you have available in terms of market share; it's not really the way we look at market share.

We're much more focused, as I said, on delivering to clients and driving returns to the bottom line at the same time.

And so, I think in terms of the long run we feel quite good.

But quarter to quarter, you may see revenue move back and forth between us and our competitors.

But it's not a big issue for us.

Okay.

Thank you.

Thanks for taking my questions.

Thanks, Christian.

Matt O'Connor, Deutsche Bank.

Good morning.

Good morning, Matt.

You had a pretty big increase in the SLR, I think about 50 basis points versus last quarter, and just trying to reconcile what drove that.

I think some of it was the assets you actually brought down last quarter that helped the ratio.

Obviously you had positive net income, but was there also a nice benefit from the final SLR rules?

So there were a whole host of things that drove it.

We definitely got benefit from the final rules, about 10 basis points.

But then when you go through, there was the balance sheet reduction, which was 15 of that.

So as you know, we took the balance sheet down in the second quarter, but it's a daily averaging in the SLR.

And so you didn't really see that benefit translate through until the third quarter.

And then there's other reductions; there's other reductions in terms of like CDS in the portfolio in terms of that.

And then obviously, there's the capital.

We reduced our significant financial institution deduction; all these things are contributors in terms of driving increase in the ratio.

I do think that the SLR is a good example of our philosophy on how we approach regulatory reform, because as you know, obviously there's been a significant improvement in that.

70 basis points over a very short period of time, and as you point out, 40 in the quarter.

We have found that by giving our people the tools, waiting till we see the final rule, and then just really focused on complying with the rule, we can move the needle.

So this is just all about compliance.

And where do you think you are on the optimization of that?

You talked about, obviously, as you get compliant for Volcker, there will be a material benefit there, but what about the other opportunities?

You had a list of things with CDS and the other reductions.

How much more, if any, is there of that?

It's funny.

We don't -- I don't think we've -- it's not like a baseball game here in terms of where we are in the innings of how do we comply.

I think the takeaway here is that the SLR is not a significant issue, as we talked about a year ago.

It's much more reflective about complying with the rules, but this will be a process that will be ongoing.

If you -- you mentioned the Volcker compliance as you come out of the funds.

Again, we're talking about something that's forward-looking to 2018.

If you made those adjustments, we'd be well in excess of 5% today, but let's see how it goes.

Okay.

And then just separately, on getting compliant for Volcker, there's a lot of focus on that and what it might mean to your equity I&L revenues.

As you think about replenishing the investments with Volcker-compliant investments, how is that landscape?

As I talk to investors, there's some concern that new investment opportunities may not be as good as they've been in the past.

But what do you think about the outlook for deploying capital in Volcker-compliant [manners] right now?

So as we talked about before, there's a number of ways that we can use our capital, and it as it comes out of the funds, capital is fungible.

So we'll have the ability to continue to invest in Volcker-compliant funds, use our balance sheet, other Volcker-compliant structures.

And so, we feel like we have enough flexibility in terms of redeploying that capital.

And of course, I think this is the critical point: if the opportunities aren't there, obviously, we can look to redeploy it into other areas of the Firm that demand the capital, or we can look to return it to the shareholders.

So from that perspective, so for us it's all about the process and the environment.

As we discussed, the environment has been a good one for harvesting.

We have been able to put capital to work in certain parts of the world, and our global footprint certainly gives us an advantage in terms of seeing opportunities.

But it's always been -- investing and lending has always been a very long-term, long cycle initiative, and we'll be very disciplined about the returns.

If the opportunities are there and they make sense, we'll deploy the capital.

If not, we'll be disciplined and we'll wait.

Okay.

And we'll probably get it in the 10-Q, but do you have the level of direct investments now, and maybe how that compares to a year or two ago, just to show how quickly that's been ramping?

It's been -- I don't have the year or two ago numbers.

Dane can follow up you with you off-line, but it's been obviously a bit of a high-class problem as we've been harvesting, values have been increasing.

So we can come back to you and get you the numbers.

The I&L balance sheet at the end of second quarter, as you know, was roughly $71 billion.

Okay.

All right.

Thank you very much.

Thank you.

Betsy Graseck, Morgan Stanley.

Hey, thanks.

That was my question, so I'm good.

Betsy, thanks.

Guy Moszkowski, Autonomous Research.

Good morning, Harvey.

Good morning, Guy.

Security services had some pretty attractive quarter-over-quarter and year-over-year revenue growth.

I was wondering if you can help us understand the dynamic there, especially in the context of what you had done last quarter in terms of bringing down some of the securities funding transactions, [SEC bar], all that stuff?

Yes.

I think what you're seeing there may be the allocation of the gain that I referenced as it related to the retirement of the trust-preferred securities.

Got it.

It's there.

Yes, so as you know, we don't have a corporate cost center.

So just as a philosophy and a discipline, we allocate out all costs to all the businesses.

In this particular case, there was a gain related to funding, so the institutional client service businesses of fixed income and equities, they're the biggest consumers of balance sheet and liquidity.

So they also get the benefit of the gains, and so that's actually really -- I think when you look at it, you'll see that that's probably it.

We detail it out in the earnings release.

So that aside then, maybe you can give us a sense for what is the impact on that business of some of the changes that you made with respect to bringing down the balance sheet in the second quarter.

So that's a good question.

So in terms of how we looked at it, it was really, as I said, I would describe it as a two-part process.

One is pretty simple and is mathematical.

One of the easiest things to do in terms of response to leverage test is actually just to rank the balance sheet and the businesses from lower ROA to higher ROA.

The second part of the exercise is a really high-touch exercise, where it's engagement in the trenches going through and working with clients and really finding out where we're providing value and where they meet our balance sheet, and that's the nuanced part of the exercise that we went through, and we will continue to go through.

But so far, the client engagement, in that business, as you know, it's one of our strongest franchise businesses.

So it feels quite good.

Thanks for that.

The other question that I had, and goes really back to some of the liquidity points that were being asked about earlier, people have been worried about the impact to the street reducing liquidity it provides to investors for a while.

But we heard a lot more about it in the last few weeks of the third quarter.

At the same time, we know that in the third quarter, the [G-50s] had to begin to make daily reports to regulators, based I guess on Volcker and some of the liquidity regs at a pretty deep level of granularity.

And I was wondering if you felt that this had had any impact broadly on the attractiveness of providing liquidity?

I would say no, certainly not at Goldman Sachs.

And I would imagine not the case across the market, although I don't have any visibility into our competitors.

You're right when you say that the data requirements in the first submission that went in right around Labor Day, it's a pretty significant amount of data.

I actually think that speaks to the opposite reaction function, and I'll tell you why: you can't create that data overnight.

We had to invest quite a bit of talent, mind share, technology, operations, front-office time, and federation time in building the systems.

And so that's been a process that's been underway, I would assume for all of our competitors and certainly for us, since the rule came out.

So it wouldn't be as though you'd show up reporting and somehow you would change your profile, or I don't know, that seems like a stretch to me.

I think, again, it's much more a -- it's the collection of the rule sets.

We did see increased sales in treasuries.

We've seen stress -- and I'm talking about in normal market functioning times, not in stress-market functioning times, definitely where balance sheet has felt scarce.

And I think under periods where clients want more liquidity, it may be more difficult to find, but we'll see how this all shakes out.

Again, the impact of the collective rule sets of all the rules, balance sheet, leverage, risk-weighted assets, liquidity, it's pretty enormous.

And I don't think we can only have positive effects from that over the next three, four, five, 10 years.

I wish that was the case.

And when you add all of that up and going back also to the pricing of security services and other securities financing transactions, are you, in real time, seeing that the scarcity value of balance sheet is driving repricing that would be favorable to you, presumably?

Well, I don't know necessarily.

Look, we've never been a firm that's first and foremost competed on price.

We compete on -- we like to compete on content, and we like to compete on the ability to provide liquidity, which may mean being the best price at any point in time for our clients.

But our clients understand -- they're very knowledgeable and increasingly knowledgeable about the regulatory constraints that are on us and on really, the entire industry.

We all have the same rule set.

So as the market responds, I just think everyone needs to be more disciplined, and some of that will depend on where your return hurdles are.

If our return hurdles are higher than someone else's, then we may be more disciplined than the next market participant.

We'll have to see.

Thanks, Harvey.

That's really helpful color.

I appreciate it.

Jim Mitchell, Buckingham Research.

Good morning.

Maybe a couple questions on the regulatory side.

Did you -- did I miss it?

Did you disclose your LCR?

Are you over 100% at this point?

We didn't disclose the number.

We're still digesting all the data, as you know, but yes, we're in excess of the minimum requirement.

As you would expect, given all the focus we've put on liquidity here.

Right.

That's fair.

And maybe a follow-up question on the Terillo commentary and the impact -- and you just talked about how ROE becomes a high ROE hurdles.

As we think about his focus about wholesale funding potentialing a charge on top of the current SIFI charge, he seems to be specifically focused on repo and even the match book.

How -- do you think -- is it just too early to start worrying about it?

Because you mentioned you're not -- you think your balance sheet is fine.

Or do you think, is this something that's going to be an increasingly something you have to focus on and may continue to shrink that market or change the way you do it, just some color there?

Thanks.

So I think it's definitely -- we haven't even seen a proposed rule, and as you know, our philosophy around these things is we've seen and we will continue to assume that regulators will give the marketplace basically a good glidepath to adjust to rule changes.

And so, we would never react or change the business methodology to commentary.

We'd wait to see the rule.

We'd engage in an active dialogue on creating a constructive rule.

Clearly, we'll be focused on the impact on markets.

It'll be very interesting to see where this discussion heads.

As you know, and I don't want to digress too much, but as you know, the SIFI surcharges are really at their core, designed around macro prudential regulation, not micro-prudential regulation.

And so, when you look at our proportion of wholesale funding as a percentage of the marketplace, you could argue we're a lot smaller than many of our large universal bank peers.

So it will really seeing how the rule plays out, but we'll engage in an active dialogue with the regulators just to ensure that we get the most [INAUDIBLE] rule and the best thing for the marketplace and our clients.

Okay.

Fair enough and maybe just one other quicky on the asset management business: you've done a good job in turning around and generating positive flows and fixed income in equities.

Is the lack of positive flows and alternatives simply your realizations?

And so if that's the case, when do you see -- I assume that's a higher-margin area.

When do you see that kind of inflection point where you start to see net flows turned positive?

I'm sorry.

Could you say that again?

I'm just trying to think through your alternative AUM.

Okay.

Your net flows have been zero, but I assume that's because you got outflows from -- but yes.

We can break it down for you after the call, and Dane can give it to you.

But basically what you're seeing there is the harvesting that you've seen in the private equity, but you've actually seen growth away from that in the other alternative asset categories.

But we can break it down for you.

That's great.

Thanks.

The growth's been pretty good.

Brennan Hawken, UBS.

Good morning, Harvey.

Hey, how are you?

Good, good.

Quick question following up on one of Jim's questions there.

So your LCR in excess of the minimum, is that the fully phased-in minimum or the first minimum threshold of 80%?

No, sorry, that's the fully phased-in.

Fully phased-in.

Cool.

Thanks.

And then a question here on the market and your comments to open up the call.

Clearly, this has been a tough year for hedge funds, and October hasn't been good either.

Just thinking about your business and the leverage to financial players, do you think that we could end the year with a real serious withdrawal of risk from some of these big portion of your client base?

And did that at all impact your decision to adjust the comp ratio here in the third quarter?

No.

That's not how we think about the comp ratio.

As I said, the comp ratio is really driven by the improvement in top-line revenues and the operating leverage we gain by managing our expenses.

I think volatility comes in different flavors; a couple months ago, people were saying volatility will never return to the marketplace.

And as I said now, people feel like we have too much volatility.

And so I think there's healthy periods of volatility and less healthy periods.

And really what we've seen in the last 48 hours is concentrated position liquidation, obviously triggered by stop-loss selling in multiple markets.

And that, at times, as we've always seen selling can beget selling.

Look, our hedge funds and asset managers and institutional clients are important part of our focus at Goldman Sachs, but we'll just stay close to our clients during this period.

But we think about it in terms of days or weeks in terms of the performance of our clients.

It's really just a commitment to the long run.

That's fair.

Thanks for that.

And then last one for me, and it seems like we chat about this every quarter, so I wouldn't want to disappoint you.

But I kind of hear you in the equities business that you don't want to get worked up over quarterly volatility, but it seems as though the equities business on a revenue basis has been losing share for a period in excess of a year.

And while it's certainly encouraging that engagement with clients remains solid, when do you think that that translates into revenue?

And I guess when do you become concerned that -- because the engagement is there ultimately to lead to revenue.

So when do you become concerned about that not translating, I guess?

So, look, it's an important question, and as I said before, we run a business for our focus on our clients, and then ultimately margins and returns.

In any given quarter, quarter to quarter, you could see noise.

In this quarter, and again, I don't have visibility into our competitors.

In this quarter, we certainly, as I mentioned in the earnings release, we had a more challenging parts of the cash business in equities client execution, so a bit more challenging for us in blocks.

Again I don't have visibility.

But I think if you step back and look at Goldman Sachs, I think actually you're seeing it translate into returns.

So we have an 11.8 for the quarter and 11.2 ROE for the year to date, I think we're doing whatever we can actually to drive to the bottom line, so I actually think you are seeing it.

Okay.

Thanks, Harvey.

Steven Chubak, Nomura.

My first question pertains to the topic of operational risk.

And digging into some of the Pillar 3 disclosures for you and your peers, it appears that you're actually running at a much lower level as a percentage of RWA at roughly 15%, I believe, at least as of 2Q, which compares to the remaining universals, or at least US-domiciled universals, running closer to 25 to 30.

And I didn't know if you could clarify, because that calculation is really determined based on industry rather than Company-specific event risk, what's driving that delta?

So you're right to say we have less, but I think it really correlates more to the fact that we're just a less complex financial institution than many of our peers.

We don't have the [painting] systems.

We don't have the consumer banking side of the business.

We don't have that, that a lot of our universal peers have.

And also, as you know, this was also driven by loss experience.

And when you look at our loss experience over the last several years, it's been significantly lower than many of our peers.

But I think it's a pretty straightforward answer.

Okay.

Fair enough.

And then just switching gears over to I&L, we've been having more conversations with investors, which suggest continued reluctance to ascribe as much value to the contributions, simply given the lack of earnings visibility tied to the portfolio gains, which at least from my point of view, I'd argue dilutes the contribution from some sustainable fee streams you have there, such as lending tied to the private bank.

I didn't know given the lack of credit that some have been willing to ascribe to merchant banking and the portfolio gains, whether you'd consider updating or amendments to your segment disclosure at least within I&L, to at the very least disaggregate the merchant banking portion from, I would argue, higher multiple and sustainable revenue streams tied to lending activities.

So maybe I'll take a step back for a second.

In terms of how we think about the investing lending businesses, if you look back over the history of time, and again, we approach this business over the long-term, it's been a significant builder of book value and certainly a valuable contribution in the way we partner with clients over many, many years.

And we do think we have some competitive advantages in that business in terms of our global footprint and ability to source transactions.

And so, I think it's economic value in terms of its contribution at the margin, you can see in it speaks for itself.

I think it's post-cyclical.

So there's always a discussion about its value in different times of the cycle, but we run it as a post-cyclical business.

And so I think the question of financial statement presentation, I'm happy to take off-line with you and Dane.

As you know, we went through a very thorough review as part of our business standards committee process to actually design our financial statements in a way that actually provided increased clarity around the various business lines.

But we're always looking to improve that clarity.

And so, look, I think we're better for having this financial disclosure.

At the time, we got very positive feedback for it.

I don't want to close and be quibby with you, but yes, do I think generally speaking the marketplace is undervalued in Goldman Sachs' businesses?

Yes.

But I don't know if it's necessarily a result of the financial statements, but we're happy to look at it.

All right.

Fair enough.

I appreciate the color, Harvey, and thank you for taking my questions.

Matt Burnell, Wells Fargo Securities.

Good morning, Matt.

Good morning, Harvey.

Thanks for taking my question.

You mentioned -- or you certainly had some nice improvement in the SLR ratio quarter over quarter.

Have you said or disclosed what buffer you might have ultimately above the 5% target that everybody's focused on?

We have several conversations with investors trying to guess that or estimate that for various companies.

Yes.

No.

We haven't focused on a buffer yet.

Remember that the balance sheet is very dynamic, and so as we comply with the rule, you can see we're making significant progress.

But we haven't determined any buffer, and obviously we have a couple years.

Again, I will underscore that as we take our investments out of funds, if you're actually to translate those same assets onto the balance sheet, that gets us to a 5.2, 5.3 level anyway.

So there's almost a natural tail wind that creates that.

But we will constantly reassess and define all these buffers as we get all the final rules.

Okay.

That's helpful.

You mentioned the backlog being so strong, and that's a combination of a number of different businesses.

And I'm going to ask when you talk to the folks in, particularly in the fixed income side of banking, if rates actually do go up at some point, how are they thinking about potential future global debt issuance in a period of rising rates, given that there's been so much issuance over the past few years at declining rates?

I realize it's hard to figure out, given the nature of the business tends to focus in many ways in sort of drive-by issuance, but how are they thinking about the potential for that type of volume over the next couple of years?

So with my crystal ball and these kind of things have never been particularly good, so I remember it was a year plus ago, we were getting asked questions when we first hit a new record in debt underwriting a year plus ago, about the end of the debt underwriting cycle.

And so, and then again, when in the second quarter we had another record this year so very difficult to predict.

I think a lot of it depends on the environment associated around the rate increases.

I think if it's again, a return to call it a normalized rates around the globe where we don't have so much incredible essential bank intervention, and it is associated with global growth, I think you could see growth in many economies around the world.

I think you'll see an increase in capital markets activity, because you'll see companies want to issue debt as they grow, as they move away from being financed by local banks.

So I think it will be environmentric centric.

If you saw -- part of what we've seen is you see large M&A transactions and the M&A environment is quite active.

You see a lot of related debt issuance, so I definitely think there's something of a reaction function over short periods of times to rate levels.

I think a lot of it will be correlated with global growth.

Thanks very much, and then just a follow-up from me, the $9 billion of the remainder of investments or Volcker-related investments you need to move out of over time, it sounds like that number really hasn't changed much since the second quarter.

Is that what we should understand from your earlier comments?

Yes, that's right.

It's actually right around $8 billion now.

Okay.

Thanks very much.

Devin Ryan, JMP Securities.

Thanks, good morning.

Most of my questions have been asked, but maybe a question on acquisitions, and now that we're getting a little better picture on the capital and regulatory framework, when you think about where you'd like to expand the business over the next several years, does the door open more to thinking about doing acquisitions?

Or really is there anything that could become more interesting, growing inorganically as you guys think about the go-forward?

So look, I think we're the leading merger and acquisition advisory firm in the world.

It would be somewhat inconsistent philosophically for us.

I think it would be in inconsistent with our core being if we said we weren't willing to consider acquisitions, and so I think you should assume philosophically and culturally that as a management team, we'd consider any acquisition if it was accretive in any area of our firm.

I do think that, as you point out, I do think that the ongoing nature of the regulatory environment probably just makes that more difficult for the industry generally.

But we'll see over time, but we're always open-minded.

Having said all that, I think we benefited as a firm over many years by keeping our culture intact and doing nothing major.

But you've seen us do bolt-on acquisitions from time to time.

So -- but that's how I'd describe it philosophically.

Okay.

Helpful.

And then staying on the M&A theme, as you mentioned being the leader, when you look at the backlog, are you seeing further divergence around trends within the US and Europe, particularly given the divergences in the economies right now?

Or does it feel like the European M&A backlog and what you guys are seeing over there in terms of the outlook is pulling off the bottom?

I know the US has led the charge there.

So in terms of -- nothing really material to share with you in terms of the shape of the geographic backlog.

As you know, merger transactions, the most significant decision a CEO, his or her management team, and a board makes in the lifecycle of a company, and so these decisions tend to come into place over many, many years in terms of how they're executed.

At the margin, obviously markets can drive thinking, sentiment has a bit been a big factor a couple years ago in preventing transactions from happening.

And then when sentiments shifted, you've obviously seen a huge uptick in activity, but there's nothing I would comment on with respect to global activity.

Certainly growth, and we see big disparity in growth around the globe.

That may be an influencer, but there's nothing to share with you today.

Okay.

All right.

Thank you.

Marty Mosby, Vining Sparks.

Hey, good morning.

(Operator Instructions)

There we go, good morning.

I wanted to make sure that as we looked at the comp ratio, and we typically get these adjustments as we get towards the end of the year, which you're saying reflect operational improvements and efficiencies, is there any thought about permanently incorporating this throughout the year so that it seems more sustainable and less temporary in year-end adjustments?

Yes.

No.

So again, there's no change in philosophy on how we'll do this.

It's always going to be a quarter-to-quarter assessment.

It's our best estimate for where we stand at that particular point in the year, and as I said, it reflects all the factors you've heard us talk about.

And then you mentioned on the debt underwriting, the regulatory pressure on leverage lending and maybe some impact there.

Does that feel a little bit more permanent as you move forward, given the stance that we've seen talked about openly by the regulators?

So the comment I made about leverage lending actually wasn't -- didn't have anything to do with that.

That was actually just transaction-specific quarter to quarter.

As I mentioned, the backlog was up at the end of the third quarter across all categories.

Okay.

Specifically, what you're talking about though, it would be interesting to see how that will evolve.

I know market participants, regulators, certainly all the all of us at Goldman Sachs are very focused on compliance with that, and that will be very interesting to see over the next several years what impact that has in terms of markets where those transactions get financed at what leverage levels, and that will be an evolving story we'll all keep an eye on.

And then lastly, the $0.05 dividend increase, while still in that 10% range, your earnings have grown much higher than that over the last year.

Revenues were up much more than that.

Excess capital is abundant.

Your payout ratio is low and your dividend yield is still relatively low, so seems like you had some headroom to maybe potentially go up a little bit more than that.

I didn't know what your thought was there.

So when we assess capital return, as you know, our preferred mechanism for capital return is really through share repurchase.

We think it allows us to be very dynamic in terms of responding to our clients' needs and market conditions.

And so while the dividend has certainly come up meaningfully, I think you should still assume that Goldman Sachs will rely on share repurchase as its predominant tool.

Got you, and humor me for one more question.

If you look at the market commentary you said with the pain of the volatility, coupled with the regulatory Volcker-compliance move and your VAR coming down, do you feel like as a market maker, are you hamstrung in ability to help the market go through some of these transitions now, given all the new regulations?

So I want to be clear, because you may have misheard me or I may have misheard you.

There was nothing that I saw about Volcker compliance that I think is, at this stage, preventing people from providing liquidity.

Volcker's been pretty visible for a while now.

The comment I was making is that it's very hard to assess the collective impact of leverage rules, increases in risk-weighted assets, reductions in balance sheets globally, in terms of the entire industry and what that means for market liquidity.

And we've certainly seen areas where people -- I haven't looked through all the data, but most firms at this stage have actually shrunk their match books.

I think I'm pretty accurate in saying that, and so all market participants, regulators included, have been asking themself the question of when we were seeing increases in sales and treasuries, whether how much of that was driven by market makers' inability or lack of appetite or not being able to position balance sheet in terms of providing that liquidity at important times.

We'll have to see again how all this evolved.

When you look at Goldman Sachs today, given the level of our capital ratios, which I described earlier in the call, we certainly have the capacity to deliver for our clients when they need it.

So --

Thanks.

Thank you.

Brian Kleinhanzl, KBW

Good morning.

Quick question, when you look at some of the regulations coming down the road here, wholesale funding surcharge being one of them and the NSFR, both of those would benefit from a greater level of deposit funding on the balance sheet.

Are you thinking about growing deposits currently?

And if you are, are you thinking about organically or through acquisition, or are you not even thinking about it at all?

So we obviously focus on it.

I think in the context of the rule making, this will be very interesting, because you mentioned the NSFR solution, so let's use that as an example.

I think as an example of a rule and a concept, I think again, that falls into the bucket of a good concept because you want good asset liability management across the industry.

We spend a huge amount of time on asset liability management and the way that we look at secured funding and how we manage our balance sheet, and we run a very conservative profile in terms of how we manage that.

With respect to this rule, it will be very interesting because we haven't even seen the Basel rule yet.

I think the big question will be again, if this -- when you add this rule onto other rules, is there some long-term impact on market liquidity?

So obviously clients, and we will be very focused on that.

As this goes through the rule-making process, because you specifically [linked] it to deposit, it will be very interesting when it gets to the US.

Because as you know in the US, it's a different legal structure in terms of your ability to use deposit funding for certain businesses.

And so, not only do we need to wait to see the Basel rule, but then we'll need to see the US rule and how they incorporate just the different legal structure that exists in the US.

So we'll have to see how it goes.

Okay.

Just a separate question on the ECM backlog, is there any specific reason this driving strength there that you said last quarter, Europe was strong in underwriting, but this quarter has that changed?

No.

It's just a normal part of the marketplace, in terms of people coming to the markets and raising capital for a variety of needs, but there's no key driver.

Okay.

Great.

Thanks.

At this time there are no further questions.

Please continue with any closing remarks.

Again, since there are no more questions, I'd like to take a moment to thank all of you for joining the call.

Hopefully, I and other members of senior management will get to see many of you in the coming months.

Certainly, if there's any additional questions, please don't hesitate to reach out to Dane.

Otherwise, enjoy the rest of your day and look forward to speaking with you on the fourth-quarter call.

Take care.

Ladies and gentlemen, this does conclude the Goldman Sachs third-quarter 2014 earnings conference call.

Thank you for your participation.

You may now disconnect.